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Model Uncertainty, Recalibration, and the Emergence of Delta-Vega Hedging

arXiv 1704.04524 ↗First posted 14 Apr 2017q-fin.MF math.OCcited by 2

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Abstract (arXiv)

We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this vanilla option, delta-vega hedging is asymptotically optimal in the limit for small uncertainty aversion. The corresponding indifference price corrections are determined by the disparity between the vegas, gammas, vannas, and volgas of the non-traded and the liquidly traded options.

Key facts. Cited by 2 papers in the map (data through 7 Oct 2026). First posted on arXiv 14 Apr 2017.

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